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Weekend Edition

The government just made the most cutthroat move of all
Saturday, February 25, 2012

 It's straight out of Atlas Shrugged...
 
The city of Los Angeles is determined to put 50-60 employers straight out of business for the greater good. And it just so happens the greater good benefits labor unions most of all.
 
For three years now, the L.A. government, with heavy backing from labor unions, has been working on a proposal to carve the city into 11 franchise zones. Once it does this, it'll assign a monopoly to one waste-hauling company for all the businesses in each zone. There are 50-60 waste haulers who regularly pick trash up at businesses in the city. The franchise zone proposal will put most of them out of business. They will be legally forbidden to sell their services in the city of Los Angeles. Residential trash pickup would be unaffected by the proposal.
 
The plan is being pushed by a union front group called the Los Angeles Alliance for a New Economy (LAANE). The LAANE says competition is too cutthroat... meaning many small waste haulers aren't unionized, so it wants to put 11 big unionized waste haulers in charge of removing all the trash from businesses in L.A.
 
Porter Stansberry has written before how government unions seize control of municipal governments and have bankrupted cities and towns all over America. The franchise proposal in L.A. is an example of a labor union using government to eliminate the competition permanently... the most cutthroat move of all.
 
 A "hat tip" to Dennis Gartman, editor of The Gartman Letter, for bringing this Wall Street Journal article to our attention... Based on recent comments from Jin Liqun, the supervising chairman of the sovereign wealth fund China Investment Corp., speaking to the al-Jazeera television network this week, it's clear the Chinese understand the fundamental issues behind Europe's woes...
 
If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labor laws are outdated. The labor laws induce sloth, indolence, rather than hard working. The incentive system is totally out of whack.
 
Why should, for instance, within [the] euro zone some member's people have to work to 65, even longer, whereas in some other countries they are happily retiring at 55, languishing on the beach? This is unfair. The welfare system is good for any society to reduce the gap, to help those who happen to have disadvantages, to enjoy a good life, but a welfare society should not induce people not to work hard.
 
 And just as they understand it, the Chinese are exploiting it... This week, car manufacturer Great Wall became the first Chinese auto manufacturer to open an assembly plant in the European Union – Bulgaria, specifically. Apparently, it's now cheaper for China to manufacture in some parts of Europe than to manufacture domestically... What will the "They took our jobs!" sect complain about when China starts exporting jobs themselves?
 
 By now, we're sure you've heard squawking about Obama's new tax bill... Next year, the dividend tax rate would increase to the higher personal income tax rate of 39.6%. Including the phasing out of certain deductions and exemptions, the rate is 41%. Finally, if you add the 3.8% investment tax surcharge in ObamaCare, the 2013 dividend tax rate would be 44.8% – nearly triple today's 15% rate.
 
But dividends are paid after the corporation pays taxes on its profits. If you assume a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on earnings paid as dividends would be 64.1%.
 
 But fear not... These new taxes would only hit the rich... as long as you define rich as individuals making more than $200,000 a year and couples making more than $250,000.
 
But isn't it typical of Komrade Obama to pit the "poor" against the "rich" as a political tool to push his agenda? The ugly truth is, he's not targeting the rich so much as he's simply targeting the successful. An increase to the dividend tax rate of this magnitude will hurt all investors, including many retirees dependent upon dividend income to meet daily living expenses. And as usual, the tax hike will hurt those at the bottom of the bracket much, much more than the top of the bracket.
 
Like all "taxes on the rich," this is NOT a tax on the rich. It's mostly a tax on the more successful upper echelons of the middle class, the small business owners, and the family farm owners.
 
 According to a study by the Wall Street Journal...
 
Historical experience indicates that corporate dividend payouts are highly sensitive to the dividend tax. Dividends fell out of favor in the 1990s when the dividend tax rate was roughly twice the rate of capital gains.
 
When the rate fell to 15% on January 1, 2003, dividends reported on tax returns nearly doubled to $196 billion from $103 billion the year before the tax cut. By 2006, dividend income had grown to nearly $337 billion, more than three times the pre-tax cut level.
 
And according to a Cato Institute study, 22 S&P 500 companies that hadn't paid dividends before the tax cut started paying them in 2003 and 2004. It's no mystery... Money goes where it is treated best. Prohibitive dividend taxes drive companies to do other things with their capital, like simply retaining the earnings or buying back stock. You can be sure these companies are already working with swarms of lawyers to find ways around this. One easy solution is to expedite cash distributions... Assuming this tax increase becomes law, we'll see lots of companies pay large, one-time "special" dividends, as they're called...
 
Our only solace is that the dynamism of businesses and individual investors trumps the static nature of government, laws, and taxes.
 
 Earlier this week, Frank discussed his Small Stock Specialist recommendation Westport Innovations, which just hit a 52-week high. The company makes natural-gas-powered engines for trucks and cars. It has partnerships with almost every major engine and auto manufacturer in the world... Shares are up nearly 200% in the past 12 months. Frank thinks the stock can still triple from here.
 
This week in Growth Stock Wire, Frank continued his discussion of natural gas as a transportation fuel... Natural gas as a transportation fuel is now 50% cheaper than regular gasoline. This huge price differential is causing some of the larger trucking fleets in the U.S. to switch from diesel to natural gas. And with more and more vehicles guzzling natural gas, there's huge demand for fueling stations...
 
 According to the Census Bureau, the U.S. has more than 100,000 gasoline fueling stations (to serve 234 million vehicles). But we have only 1,000 natural gas fueling stations. We'll need thousands more to support the trucking industry's switch to natural gas...
 
Several U.S. companies are opening natural gas fueling stations... And most are trading at 52-week highs. But as Frank says, "We are still in the early stages of the natural gas infrastructure trend. In other words, investors can still cash in on this trend by investing in some of the companies building 'America's Natural Gas Highway.'"
 
Frank believes once these stations are built, major car manufacturers like GM, Ford, and Toyota will start manufacturing cars that run on natural gas. It's a huge trend... one that can make you rich. To receive a special report Frank just released discussing all the companies positioned to benefit from the U.S. switch to natural gas, click here to learn about a subscription to Small Stock Specialist...
 
Regards,
 
S&A Research




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MetroPCS Comm. PCS +13.0%
Sears Holdings SHLD +12.7%
Federated Investors FII +12.0%

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Thailand TTF +3.8%
France EWQ +2.9%
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France EWQ +2.9%
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Gold Mining GDX +4.2%
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Cocoa +7.7%
Platinum +7.4%
Lead +6.5%

Date Range:2/16/2012 to 2/23/2012
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Gilead Sciences GILD -17.6%
Newfield Exploration NFX -10.7%
Hewlett-Packard HPQ -9.5%

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India IIF -1.5%
Indonesia IF -1.0%
Mexico EWW -0.9%

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Semiconductors PSI -2.5%
Biotech PBE -2.4%

S&P 500 Symbol Change
Gilead Sciences GILD -17.6%
Newfield Exploration NFX -10.7%
Hewlett-Packard HPQ -9.5%
Countries Symbol Change
India IIF -1.5%
Indonesia IF -1.0%
Mexico EWW -0.9%

Sectors Symbol Change
Airlines FAA -9.0%
Semiconductors PSI -2.5%
Biotech PBE -2.4%

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Cotton -5.1%
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Date Range:2/16/2012 to 2/23/2012
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